THE CHAMBER OF TAX CONSULTANTS Regulations relating to Outbound Investments with Case studies and Issues Presented by: Mr. Paresh P. Shah P. P. Shah & Associates Chartered Accountants Email: ppshahandassociates@gmail.com 13th December, 2019 P. P. Shah & Associates 1
Overview Overseas Direct investments under FEMA Overseas Direct Investments under LRS Branch outside India Practical Issues – ODI Case Studies – ODI Factors affecting choice of jurisdiction outside India 13th December, 2019 P. P. Shah & Associates 2
Overview Abbreviations: Authorised Dealer(AD), Capital Account transaction (CAP), Current Account Transaction(CAT), Foreign Exchange(FE), Government of India (GOI) , Notification no.(Notf.), Person Resident Outside India(PROI), Person Resident in India (PRII), Non Resident Indian (NRI), Overseas Citizen of India (OCI), Person of Indian Origin (PIO), Reserve Bank of India (RBI), Indian Party (IP), Joint Venture (JV), Wholly owned Subsidiary (WOS) 13th December, 2019 P. P. Shah & Associates 3
Overseas Direct Investments under FEMA Regulated under separate Notification No. 120 What is the rationale for having separate notification to regulate overseas direct investments? Shortcomings.... Ntf. No. 23(R) Ntf. No. 14(R) Ntf. No. 9(R) Ntf .No 14(R) 13th December, 2019 P. P. Shah & Associates 4
Overseas Direct Investments - FEMA Ntf. 120 Regn. 6 – Conditions for Automatic approval Regn. 6A – Investments in Agricultural operations overseas directly or through Overseas Offices Regn. 6B – Investment in Listed Equity overseas by a listed Indian company Regn. 6C – Investment by Mutual Funds Regn. 7 – Investment by IP in Financial Services Regn. 8 – Investment by swap or exchange of shares Regn. 9 – Prior Approval Route Regn. 9A – Overseas Investments by Regd. Trust / Society Regn. 10 – Unique Identification Number Regn. 11 – Investment by Capitalization Regn. 12 – Export of Goods towards Equity Regn. 13 – Post investment changes / additional investment in existing JV / WOS Regn. 14 – Acquisition through bidding / tender Regn. 15 – Obligations of Indian Party Regn. 16 – Transfer by way of sale of shares of JV / WOS Regn. 17 – Transfer involving write-off Regn. 18 – Pledge of shares of JV / WOS Regn. 18A – Creation of charge on domestic and foreign assets 13th December, 2019 P. P. Shah & Associates 5
Overseas Direct Investments - FEMA Ntf. 120 Regn. 19 – Prior RBI approval for Proprietory in India to accept shares Regn. 19A – Overseas Investments by Proprietorships / unregistered Partnership Firm in India being recognized Star Export House Regn. 20 – Investments by Individuals for acquiring shares as consideration for professional services rendered Regn. 20A - Acquisition or Setting up of a JV or WOS abroad by resident individual (w.e.f. 5th Aug. 2013) Regn. 21 – Issue of foreign security (FCCB) by person resident in India Regn. 22 – Purchase / acquisition by way of gift / inheritance / ESOP Regn. 23 – Transfer of foreign security by way of pledge by person resident in India Regn. 24 – General permission for acquiring qualification / rights shares and foreign securities under ADR/GDR linked stock options schemes Regn. 25 – Prior RBI approval for qualification shares in excess of limits specified under Regn. 24 Regn. 26 – Investments by Mutual Funds / Venture Cap.Funds Regn. 27 – Opening of Demat Accounts with foreign depositories by Indian Clearing Corporations and Clearing Members 13th December, 2019 P. P. Shah & Associates 6
Eligible Investors ODI Resident Indian Party Registered Mutual Funds Individuals Trust/Society registered with under Approval SEBI route Indian company Registered Partnership firm LLP Body created under Act of Parliament Any other entity notified by RBI 13th December, 2019 P. P. Shah & Associates 7
Auto Route-How much can be Invested? Overall ceiling of the investment: “Financial Commitment” plus amount in EEFC A/c plus amount raised via ADR/GDR issue Financial commitment of the IP can not be more than 400% of the Net worth of the IP; however, financial commitment exceeding USD 1 (one) billion (or its equivalent) in a financial year would require prior approval of the Reserve Bank Net worth of Holding or subsidiary company maybe taken into account to the extent not availed Net worth: Regn. 2(o)-Paid up capital and free reserves What is Financial Commitment? [Reg.2(f)] 13th December, 2019 P. P. Shah & Associates 8 8
Auto Route-Financial Commitment Financial Commitment Reg.2(f): Amount of Direct Investment by way of contribution to the equity and loan and 100% of guarantees issued by an IP to or on behalf of its overseas JVC or WOS plus 50% of Performance Guarantee Contribution to Equity can be by Cash contributions or Purchase of Shares or by Capitalization of Exports and Repatriable Entitlements External commercial Borrowing (ECB) Swap of IP‟s shares or ADR GDR Swap Loan to Overseas Entity (only if Equity is issued to IP) Guarantees to or on behalf of overseas entity 13th December, 2019 P. P. Shah & Associates 9 9
Auto Route- Financial Commitment (con‟t) Guarantees to or on behalf of overseas entity Cannot be open-ended; Period & amount to be specified Corporate guarantees only In case of performance guarantees by IP, 50% is considered for financial commitment; if invocation leads to breach of ceiling of 400% of net worth of IP, prior RBI approval is required before remitting funds from India [Ref: Cir. No. 69 dt. 27/05/2011 & Master Direction 15 dt. 01.01.2016] Bank guarantee issued by a resident bank on behalf of an overseas JV / WOS of the IP, which is backed by a counter guarantee / collateral by the IP, shall be reckoned for computation of the financial commitment of the IP [Ref: Cir. No. 96 dt. 28/03/2012 & Master Direction 15 dt. 01.01.2016]] 13th December, 2019 P. P. Shah & Associates 10 10
Auto Route-What is Prohibited & Exempted? Prohibitions: Portfolio Investment, Real Estate & Banking Sector As per RBI‟s FAQs on ODI, Indian banks operating in India can set up JVs/WOSs abroad provided they obtain clearance under the Banking Regulation Act, 1949, from the Department of Banking Regulation (DBR), CO, RBI Exemptions: Investment through RFC A/c Bonus issue Investment by Persons Resident in India but not permanently resident in India. Auto Route not available for ODI in Pakistan 11 11 P. P. Shah & Associates 13th December, 2019
Conditions for ODI under Auto Route Financial Commitment -up to 400% of the net worth JV/WOS should be in bona fide business activity Indian Party not on RBI‟s caution list or defaulters list Indian Party has submitted its Annual Performance Report in respect of all its overseas investments All transactions to be routed through one branch of AD Submission of duly completed Part 1 of ODI form to AD No investments in non co-operative countries as per FATF Valuation of shares if investment is in Existing venture P. P. Shah & Associates 12 12 13th December, 2019
Eligible Entities for Investment – Important definitions as per Notification 120 Sec. 2(e): "Direct investment outside India" means investment by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity or by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange, but does not include portfolio investment Sec. 2(m): "Joint Venture (JV)" means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party makes a direct investment Sec. 2(q): "Wholly Owned Subsidiary (WOS)" means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country, whose entire capital is held by the Indian party 13 13 P. P. Shah & Associates 13th December, 2019
Eligible Entities for Investment (con‟t) „Foreign entity‟ is not defined But from aforesaid definitions, it is one that is formed, registered or incorporated in accordance with laws of host country So can a foreign Proprietorship, Partnership Firm, LLP, Trust be considered as „Foreign Entity‟? As per definition of „Direct investment outside India‟, investment has to be by way of purchase of shares; hence foreign entity must have Share Capital. Therefore, does it exclude investment in Firm, LLP or Trust as such entities do not have Share Capital even though they fall within the definition of „Foreign entity‟ as they are formed or registered in accordance with laws of host country? Portfolio Investment is not defined 13th December, 2019 P. P. Shah & Associates 14 14
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